We’ve hit “peak oil”; now comes permanent price volatility

Oil production has remained stable since 2005, even as demand increased. The …

Since 2005, the global production of oil has remained relatively flat, peaking in 2008 and declining since, even as demand for petroleum has continued to increase. The result has been wild fluctuations in the price of oil as small changes in demand set off large shocks in the system.

In today's issue of Nature, two authors (the University of Washington's James Murray and Oxford's David King) argue that this sort of volatility will be all we can expect from here on out—and we're likely to face it with other fossil fuels, as well.

Limited supply

The notion of peak oil is a fairly simple one: oil is a finite resource and, at some point, we simply won't be able to extract as much as we had previously. There really is no getting around that limit for any finite resource. The issue that has made peak oil contentious, however, is the debate over when we might actually hit it. Murray and King are not the first to conclude that, even as the arguments were still going on, we had already passed oil's peak. Even though prices have gone up by about 15 percent per year since 2005, production has been largely flat.

The strongest argument against this being a real peak is the increasing volume of petroleum reserves reported by many countries. Even assuming those estimates were reliable (which the authors aren't entirely certain about), these reserves have clearly not enabled increased production. In the US, for example, production as a percentage of total reserves has dropped from nine percent to six percent over the last three decades.

"We are not running out of oil," the authors argue, "but we are running out of oil that can be produced easily and cheaply." This creates significant delays before any of the new reserves can be tapped, and it limits the amount of oil that can be economically extracted from them.

Non-conventional sources like oil sands have the potential to contribute to the global supply but, so far at least, they haven't managed to do so; current production estimates indicate that they won't any time soon.

The struggle to mobilize supplies has taken place against a backdrop of falling production and rising demand. Most established sources of oil are seeing declines in the area of five percent annually. Given that decline, it will be extremely difficult to meet demands projected for 2030—in fact, we'd have to add the equivalent of our total current production. In a fit of understatement, the authors deem this "very unlikely to happen."

Economic impacts

What are the consequences of being stuck at or near peak oil? The authors have produced a graph showing that, while supply is elastic enough to meet demand, prices stay stable. Once demand consistently exceeds supply, prices swing wildly. Murray and King term this a "phase transition" and suggest we'll be in the volatile phase from here on out.

That has some pretty significant consequences. Of the 11 recessions the US has experienced since World War II, 10 have been preceded by a sudden change in oil prices. The US isn't alone, either. Italy's entire trade deficit, which has contributed to its financial troubles, can be accounted for by the rise in imported oil. The world, it seems, has allowed its economies to become entirely dependent upon fossil fuels. "If oil production can't grow, the implication is that the economy can't grow either," the authors write. "This is such a frightening prospect that many have simply avoided considering it."

And it's not just oil that poses problems. US coal production peaked in 2002, and the global peak has been predicted to hit as soon as 2025. The last time global coal reserves were evaluated, in 2005, the total was cut by more than half compared to previous estimates. Fracking has boosted the production of natural gas dramatically, but even here the authors find some reasons for concern. Recent reports suggest that shale gas reserves have been overestimated, and many fields that have been in production for a while have experienced large declines in production.

The commentary concludes that we simply can't rely on any fossil fuel to provide a stable and economic source of energy for more than a couple of decades. And, given the economic shocks that result from rapid changes in energy prices, that's a serious problem. "Economists and politicians continually debate policies that will lead to a return to economic growth," the authors note. "But because they have failed to recognize that the high price of energy is a central problem, they haven't identified the necessary solution: weaning society off fossil fuel."

This weaning will require a large deployment of efficiency measures, nuclear power, and renewable energy sources. All of this will take time, which is why efforts need to be started now, the authors argue. (Not mentioned, but equally true, is the probability that taking these measures will smooth out the impact of reaching peak fossil fuel production.) Unfortunately, since most governments are unwilling to admit the prospect of indefinite economic stagnation due to our reliance on fossil fuels, they've been unable to generate the political will to even begin these efforts. Murray and King clearly hope their commentary will help get the ball rolling.